Question

In: Accounting

Return on Investments and Residual income

Baird Home Maintenance Company earned operating income of $6,587,900 on operating assets of $58,300,000 during Year 2. The Tree Cutting Division earned $1,242,260 on operating assets of $6,940,000. Baird has offered the Tree Cutting Division $2,070,000 of additional operating assets. The manager of the Tree Cutting Division believes he could use the additional assets to generate operating income amounting to $432,630. Baird has a desired return on investment (ROI) of 9.30 percent.

Required

  1. Calculate the return on investment for Baird, the Tree Cutting Division, and the additional investment opportunity.

  2. Calculate the residual income for Baird, the Tree Cutting Division, and the additional investment opportunity.

 

 

Solutions

Expert Solution

a. ROI= OI / OA

Baird Home Maintenance 

ROI = $6,587,900 / $58,300,000

Return on investment is 11.30%

Tree Cutting Division

ROI= $1,242,260 / $6,940,000

Return on Investment is 17.90%

Additional Investment Opportunity: 

ROI= $432,630  / $2,070,000 

Return on Investment is 20.90%

 

b. RI= OI -( OA x Desired ROI)

Baird Home Maintenance 

RI= $6,587,900 - ($58,300,000 x 0.093)

Residual Income is 1,166,000

Tree Cutting Division

RI= $1,242,260 - ($6,940,000 x 0.093)

Residual Income is 596,840

Additional Investment Opportunity: 

RI = $432,630 - ($2,070,000 x 0.093)

Residual Income is 240,120


a.

Baird Home Maintenance 

Return on investment is 11.30%

Tree Cutting Division

Return on Investment is 17.90%

Additional Investment Opportunity: 

Return on Investment is 20.90%

 

b. 

Baird Home Maintenance 

Residual Income is 1,166,000

Tree Cutting Division

Residual Income is 596,840

Additional Investment Opportunity: 

Residual Income is 240,120

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